Cantillon: growing signs of life in euro economy

Latest purchasing managers’ index for the euro zone shows the fastest rate of expansion in 4½ years

Is there finally a sign of some life in the euro zone economy? The latest purchasing managers’ index for the euro zone showed the fastest rate of expansion in 4½ years, with a reading in November of 54.4, up from 53.9 in October. A reading over 50 signifies growth – so we are not talking about a rapid rate of growth, but it is adding to other indicators signalling some kind of an upturn in growth. The one notable exception in the latest figures was France, where the terrorist attacks understandably led to weakness in the data, some of which was collected over the past week or so.

Interestingly, while the figures suggest stronger growth, they are not leading to a change in expectations that the European Central Bank will announce in December that it is to inject more cash into the economy. This is because while activity is increasing, there is precious little sign that companies are feeling able to increase their prices, with the price of their inputs also continuing to fall, partly as a result of weak commodity prices.

In some ways this is good news for Ireland. Stronger growth in our export markets will be beneficial, but interest rates are set to remain low. The Economist newspaper argued recently that Ireland could actually do with higher interest rates, given the rapid rate of economic growth. This is justified when looking at some areas of the economy, but low interest rates are giving us an extraordinary opportunity to lock in low borrowing costs for our national debt.

Notably, while all the expectations are that the ECB will ease policy when it meets in early December, the US Federal Reserve Board is likely to go the other way.

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It now seems increasingly likely that it will announce the first increase in its base interest rates – the Fed funds rates – for eight years. Given that this rate is effectively zero at the moment, a small move up may not seem like a big deal. But the financial markets think otherwise, seeing it as a big turning point.

The divergence between US and European rates will be a big theme of 2016. If it keeps the euro weak, this will also be good news for Ireland, helping exporters to the US , UK and other non-euro-zone markets.